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EUR/USD, GBP/USD Forex Market Commentary August 24, 2012

I cant wait for this month to be over and the markets get back to the new normal. Meaning the abnormal markets we had before summer started. The summer doldrums have made it rough trading. I never really thought I would be wishing to see the markets as they were before June but anything is better than what we have had the last two and a half months. The Euro did as expected in the August 23 forex commentary even though it was a short push up those that got a good entry had a potential 50 pips on the table. Unfortunately I took the GBP/USD long and did get an awesome entry at 1.5870. The problem is once it started to shift and went 18 pips in profit I was very tired and decided to go to bed and it took another 45 minutes to hit +20 and I was already in bed and of course didnt move the stop to break even. needless to say I woke up to a 20 pip hit. Oh well on to the next trade.

Today we are staring at what looks to be more of a 2 push move for just under 300 pips. At least thats what looks the clearest with no consolidation between the second and possibly third push yesterday that was only 75 pips at best. If it wasnt Friday I would be looking for the next push upwards again however at this point I have to treat this as a 3rd push trade and at least consider the possibility of the reversal today. The place I will be happiest to short from will be yesterdays highs and would like to see the clear stop run above those highs for the direction to be clear. Of course we have to consider the long from the lows but only on some clear price action showing the trap move.

The GBP/USD has the clearer looking pushes with the 2 pushes up and a 50 pip range chop yesterday. Today the higher probability still says we should see the third push up and if that does happen the likelihood of it dragging the Euro with it is there so if they are tightly correlated today the chance they will both go up is better. Right now its finding support at some daily highs from May so as long as the Asian markets can hold it there I will be looking at the Asian lows for the manipulation and the push up to break the highs from yesterday. However being Friday I wont be holding for the full 90 pip run as the weekly flows do have a chance of holding it below. A good 50-60 pips will be a good end to a mediocre week. Since trading against the 2nd push is a high risk trade I will only be considering it with a 1hr stop run to the highs and that will be if I am not already long.

Forex News Today

As usual Friday news is light with nothing high impact from the Euro Zone. The UK does have its revised GDP figures expected to improve slightly but still be negative. there is a chance this could surprise to the upside because of the Olympics but I would expect the move to be short lived and used more to manipulate than be sustained.

The US has Core Durable Goods Orders that considering the better than expected New Home Sales data yesterday has a chance to surprise to the upside. If it does it has potential to deflate some of the QE hopes and will be USD positive.

Today I leave you with an article from my favorite gloom and doomer Grahm summers and his guarantee the Fed will not do more QE and I have to agree the argument is strong.

Listen up Mainstream Financial Media, the Fed is not going to announce QE 3. You’ve been running the same tired stupid story after every single FOMC meeting since May 2011, desperately trying to spin everything the Fed says into a call for more QE.

The fact of the matter is that only a handful of Fed members have called for more QE. They are Charles Evans and Bill Dudley, both of whom represent financial centers (Chicago and New York). These guys want QE Infinity because they represent the banks and could care less about the average American. Heck, Dudley even went so far as to suggest inflation was under control because iPads are getting cheaper… at a time when food prices were at all time highs!

Those folks have been clamoring for QE all along. This is nothing new.

Let me explain why QE 3 is not coming and why your desperate feeble attempts to spin every Fed statement into a call for more QE is going to bite you in the tail.

The Fed cannot announce QE 3 because:

  1. Food prices are already exploding higher towards records
  2. Gas prices are sharply up
  3. Inflation is actually much much higher than CPI claims
  4. The stock market is at or near four year highs

Those are the obvious reasons that anyone with a working brain could figure out. Now let’s explain the more significant reasons that someone who actually grasps how the financial system works knows about.

If the Fed announced QE 3, or decided to monetize everything in sight, the bond market would implode. Every time we’ve had QE, interest rates have risen. More QE now after we’ve already had QE 1, QE lite, and QE 2 would signal that the Fed is willing to monetize everything under the sun. The end result would be an absolute catastrophe (the bond market dwarfs the stock market in size) as bonds would collapse, sending interest rates through the roof.

This in turn would take down many corporations as they’d be forced to default on their debt payments. It would also destroy the US economy as credit card defaults, mortgages, student loans, etc would be defaulted upon.

So no QE, guaranteed.

There’s another reason QE isn’t coming. QE sucks Treasuries out of the financial system. Treasuries are the senior most assets against which banks make their trades. Consider that the top four banks in the US (JP Morgan, Goldman Sachs, Bank of America, and Citirgroup) only have $7.12 trillion in assets backstopping over $200 TRILLION in derivatives.

When the Fed “monetizes” debt it is in fact pulling assets out of the system (swapping out Treasuries and other assets for cash). With over $224 TRILLION in derivatives outstanding this is the LAST thing the Fed wants.

Indeed, Bernanke has all but admitted this recently, saying “I assume there is a theoretical limit on QE as the Fed can only buy TSYs and Agencies… If the Fed owned too much TSYs and Agencies it would hurt the market.

Why would it hurt the market? Because the banks NEED these assets . And QE takes them out of the system.

Trust me… Bernanke knows about this situation in the financial system. This is why he propped up the four TBTFs as well as Fannie/ Freddie and AIG while letting just about everyone else go under: if these firms collapsed it would implode the system.

So QE is not coming. That’s a fact. You can spin the Fed’s language however you want but you’re just making stuff up. You’ve been wrong about QE 3 for over a year now. And you will remain wrong. All you’re doing is propping up stocks with your propaganda.

Have a great weekend


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